Fixed deposits vs Singapore Savings Bond - what you need to know

Singapore Savings Bonds (SSBs) are one of the best places for Singaporean to park their cash.

At a low minimum of $500, and promising (over time) a higher interest rate, they seem to overshadow fixed deposits at every turn.

Yet, some Singaporeans still prefer fixed deposits to SSBs.

The difference between SSBs and fixed deposits

Fixed deposits (also called time deposits) are monies placed with the bank. As long as you don’t withdraw the money within a given time (usually between three to 36 months), the fixed deposit continues to accrue interest. At the time of writing, some of the best fixed deposits have interest rates reaching 1.8% per annum.

If you withdraw the money before the maturity date, however, you will lose all the accrued interest (although you will get your initial capital back).

Singapore Savings Bonds (SSBs) are loans made to the Singapore government. Due to our government’s track record (Singapore has never defaulted on its debts), these bonds are among the safest you’ll ever find.

SSBs have a unique form of interest. The interest rate is pegged to Singapore Government Securities (SGS), which usually means an interest rate of between 2-3% per annum. This is much higher than fixed deposits.

However, the interest is not paid out immediately. SSBs pay interest in the form of coupons. For every year you keep the SSB, the coupon “steps up”. If you’re able to keep the SSB for a maximum of 10 years, the interest rate earned would be between two to three per cent.

Another major difference is flexibility. You don’t have to keep the SSB for the full 10 years; you can sell it on any month. And even if you sell the SSB before the 10 years are up, you get to keep the accrued interest.

So SSBs are always better than fixed deposits, right?

Actually, no. SSBs outperform fixed deposits in the long term, and are more flexible. But over shorter periods, fixed deposits can actually outperform SSBs.

For example, consider the bond issues for 1st February 2018. The average return per year, over 10 years, comes to 2.04 per cent. Let’s compare this with the highest available fixed deposit rate today, which is 1.85 per cent per annum*.

Let’s say you deposit $25,000, over a 36 month period.

Using the bank’s fixed deposit rate of 1.85 per cent (compounded monthly), the total interest earned is around $1,425.60 by February 2021.

However, if you use the SSB and withdraw on the third year, you have the equivalent interest of 1.6 per cent per annum. The total interest earned is only around $1,203, a difference of around $222.

So over the short term, some banks can provide interest rates that outperform the SSBs.

*Interest rates from banks fluctuate constantly, and there is no guarantee that a given rate will always be available. There are times when no bank offers rates that matches SSBs. Be sure to compare the latest fixed deposit options from multiple banks, before making your decision.

So should I go with fixed deposit or SSB?

As a rule of thumb, use SSBs if you’re holding money for five years or more. But actively compare between SSBs and fixed deposits, for shorter periods.

Most of the time, the SSB interest rates are stepped up to over 1.9 per cent by the fifth year (check the latest bond issue for details). This is almost always better than any fixed deposit, so you’re better off using it if you want to hold cash for five years or more.

For shorter periods, such as one to three years, don’t assume that SSBs always outdo banks. Check the latest rates and compare them - you may find that, at certain times, SSBs will grow your money faster over the short term.